According to the Economic Survey of Pakistan released FY 2022, the outbreak of Covid pandemic in 2019 has led to a worldwide macroeconomic shock of unprecedented magnitude. The central banks responded aggressively to avoid deep recession in the economies. Short-term interest rates, which were already low in most advanced economies, quickly declined to around zero in all advanced economies, outpacing their responses to Global Financial Crisis (GFC) in terms of both speed and scope.
Emerging markets also experienced sharp falls in short-term interest rates, approaching zero in various countries. The experts in the economic survey also revealed that the central banks supported national government’s expansionary fiscal policy initiatives in the form of tax cuts and higher government spending to boost aggregate demand and employment.
The GFC and the Covid-19 have shifted the focus of monetary policy, which involves significant budgetary expansion even if it requires using the money-creation capacity of the central bank. The global recovery was predicted in 2021 after contraction in 2020, but the momentum slowed and fueled by the highly transmissible Delta and Omicron variant, along with emerging price pressures, because of unusual pandemic-related developments, soaring worldwide commodity prices and pandemic-induced supply-demand imbalances during second half of 2021.
Further, the Russia-Ukraine conflict increases immediate financial stability risks and questions about the longer-term impact on markets early in the 2022. In a nutshell, the sharp increase in commodity prices combined with long-term supply disruptions, has exacerbated pre-existing inflationary pressures and shifted inflation risks to the upside.
In various countries, inflation has become a central concern. In some advanced economies, including the United States and some European countries, it has reached its highest level in more than 40 years.
In the survey statistics showed that Pakistan’s economy has witnessed a V-shaped recovery in FY2021 after witnessing a contraction of 0.9 percent in FY2020. According to the State Bank of Pakistan (SBP), the banking industry recorded a growth of 19.6 percent particularly because of much higher private sector participation in the economic growth during the calendar year 2021. In the context of strong economic expansion, the financial sector manifested steady performance while its financial and operational resilience remained intact.
Statistics also showed that the financial sector’s asset base expanded by 15.6 percent in CY21, while financial markets observed a relatively contained volatility compared to previous year. The banking industry — the main part of the financial system — also recorded strong growth of 19.6 percent, which was mainly aided through a surge in private sector advances. It is also recorded that the expansion was well supported through healthy deposits growth of 17.3 percent, while banks also grew reliance on borrowing from the banking system, adding that the credit risk of the banking industry remained contained as gross NPLs (non-performing loans) ratio fell by 130 basis points to 7.9 percent.
Accordingly, the net NPLs ratio fell to 0.7 percent, showing lower residual risk to the solvency from delinquent loans. On the performance front, the earning indicators observed improvement as ROA (return on assets) reached at 1 percent and ROE (return on equity) enhanced to 14.1 percent. Because of improved earnings, banks’ solvency remained strong as reflected in the high Capital Adequacy Ratio of 16.7 percent that stayed well above the minimum domestic regulatory benchmark of 11.5 percent and international benchmark of 10.5 percent.
Furthermore, Non-Bank Financial Institutions (NBFIs) recorded 190 percent growth in CY21, adding that three housing finance companies were organized in CY21 as a consequence of the government’s initiatives to promote the housing sector. The Islamic banking segment also recorded strong performance with a 30.6 percent rise in its asset base during CY21, enlarging its share by 160 bps to 18.6 percent in the banking industry.
Microfinance banks, which showed a reasonable growth, observed an inch up in infection rate and deterioration in earning indicators. SBP presently adopted more Shariah standards to promote Islamic banking. However, the SBP has recently approached the Supreme Court of Pakistan to find a solution for the implementation of riba-free banking.
The Federal Shariat Court (FSC) came up with a final verdict on interest-free banking and gave a timeline to implement the decision. It is said that SBP had been adopting Sharia standards of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). The standardisation and harmonisation in Sharia practices and procedures are assisting in elevating the local Islamic banking industry at par with the international best practices.
SBP adopts more AAOIFI Shariah Standards for the Islamic Banking Industry Strengthening Shariah compliance of the Islamic banking industry in line with best international practices is one of the key pillars of SBP’s 3rd Strategic Plan for the Islamic Banking Industry 2021-25.
On the other hand, SBP introduced Pakistan’s Instant Payment System, Raast, which marked a major step towards implementing the National Payment Systems Strategy. Since the launch of its P2P (person to person) component in February 2022, the number of Raast IDs registration surpassed the 10 million mark, with an aggregated value of transactions crossing Rs36 billion. Similarly, the Roshan Digital Account initiative, which was launched in late CY20 crossed 416,000 accounts with a cumulative inflow of over $4.4 billion by the end-May.